China's affluent are as pessimistic about the economy as they were during the Covid-19 pandemic

A recent Oliver Wyman study reveals affluent Chinese economic sentiment has deteriorated to pandemic-era lows, with 22% expressing negativity in May, surpassing October 2022 levels and reflecting a significant long-term pessimism. This shift, driven by retail sales slowdowns, deflationary pressures, and declining property values, is expected to lead to more cautious spending and saving patterns among this crucial demographic. While domestic consumption remains subdued, there's a notable rebound in international travel among the affluent (projected 37% in 2024 vs. 32% in 2019), signaling a preference for experiences over luxury goods and a potential reallocation of discretionary spending.

Analysis

Economic sentiment among China's affluent consumers has deteriorated to a new low, with 22% of respondents in a May Oliver Wyman study expressing negativity, a level slightly exceeding the 21% recorded in October 2022 just prior to the end of zero-Covid policies. This pessimism is not short-term; respondents' five-year outlook is now significantly less optimistic than it was in 2022, indicating a fundamental and potentially prolonged shift towards cautious spending and saving patterns. The sentiment is underpinned by tangible economic headwinds, including slowing retail sales growth, persistent deflationary pressures, and declining property values, which form the majority of household wealth. A demographic divide is apparent, with young people (18-28) being the most pessimistic, while the wealthier 29-44 cohort remains more optimistic, likely due to greater accumulated wealth and job stability. Despite the overarching gloom, a notable behavioral shift is occurring: affluent consumers are prioritizing spending on international travel over luxury goods, seeking immediate experiences. This is evidenced by a projected 37% of affluent Chinese traveling abroad in 2024, surpassing the 32% pre-pandemic level of 2019, with a clear preference for regional destinations like Malaysia and Japan.

Key Decisions for Investors

• Investors should exercise caution on China-focused consumer discretionary stocks, particularly those in the domestic luxury goods sector, given the deep-seated pessimism and shift away from material purchases among affluent consumers.
• Consider opportunities in the travel and leisure sectors of Japan and Southeast Asia, as these regions are the primary beneficiaries of the resilient and growing demand for international travel from affluent Chinese tourists.
• Monitor China's youth unemployment rate and property market data as key leading indicators for any potential shift in consumer sentiment, as the current pessimism among younger demographics signals a long-term headwind for domestic consumption.